Global Recession, Trade War and Rare Earths

The partial collapse of talks between the US and China on any agreement between the level of tariffs imposed by the US and the exclusion of Huawei, the Chinese telecom and techonlogical giant, from the US market forced the China to use as a last resort the threat of using in the future an embargo on rare-earths exports.

A growth of this type will be the culmination of commercial/geopolitical competition between the world’s two largest economies.

by Thanos S. Chonthrogiannis-https://www.liberalglobe.com

What does the term “rare earths” mean?

Before proceeding with our analysis, it is very important for the reader who does not know, to be informed what the term “rare earths” means. When you mention the term rare earths, it refers to a group of seventeen (17) rare metals with unique properties. Briefly we will mention that these seventeen in number rare metals are:

Cerium (Ce), Dysprosium (Dy), Erbium (Er), Europium (Eu), Gadolinium (Gd), Holmium (Ho), Lanthanum (La), Lutetium (Lu), Neodymium (Nd), Praseodymium (Pr), Promethium (Pm), Samarium (Sm), Scandium (Sc), Terbium (Tb), Thulium (Tm), Ytterbium (Yb), Ytirium (Y).

Their usefulness and application are made in a massive way,

1. in the innovative industry of high technology, smart energy networks, wind turbines, photovoltaic, hybrid, hydrogen and pure electric cars respectively, in digital information and communication technology, magnetic tomography, hydrocarbon catalysts, various high-tech weapons systems and elsewhere.

2. In addition, we should mention that rare earths have been used as improvers in agricultural production since the early 1980. China is making massive use of these in its agricultural sector.

China’s strategic threat with an embargo on rare earth exports

The threat from China in the future implementation of this measure in the non-zero game theory is in the form of a future transaction of counter-performance of equal countermeasures to the current US applicable measures (of the opponent) against China.

It is a game of type tit-for-tat and in the case of China was not implemented in the USA but was used as a warning for future use if the US does not mitigate the measures to date that have imposed or if they have not only stopped the measures already imposed and continue to impose new measures against China in the future (e.g. if the US imposes 25% duties on other Chinese imports worth $300 billion).

This type of game is customary to appear and has special application in trade, particularly in situations of commercial warfare and especially in cases where duties and quotas are imposed as measures to reduce imports from one country to another.

Essentially, China has warned that if the US continues to impose measures against the Chinese economy and more generally against China they will “hit” the US, with the implementation of this threat measure, in the softer underbelly of the United States. In raw materials-rare earths- which are highly necessary in the manufacture and production of low cost high- tech products.

How the United States will respond in such a case is difficult to predict. The most likely scenario is the even greater exclusion of Chinese products not only in the US markets but also in the overall markets of the West. This would be a very unpleasant development for the two largest economies on the planet and, more generally, for the global economy and peace.

At the same time, the US and the West in general should develop extraction, separation and processing processes in other areas of the world with rare-earth reserves.

Due to the increased costs for these rare earth acquisition processes, the US Congress at 07/03/2017 passed a bill (H.R. 1407-Metals Act 115^th Congress (2017-2018), https://www.congress.gov/ bill/115th-congress/house-bill/1407) which will commit 1% of the general costs (overhead costs) of the US defense budget in order to become a specific investment fund that strengthens through low-interest loans US mining companies for a series of metals which are strategically/critically considered in the production of high-tech systems. In fact, rare earths are photographed with this bill. 

The use of China’s global strategic position on the rare earths

China used this threat with rare earths because it holds 40% of the world’s rare earth reserves. Certified stocks of rare earths exist in the USA, Australia, Kazakhstan, Vietnam, Norway, Brazil, India, Australia, Malaysia, Greece. While there are indications of large stocks of rare earths in the Arctic.

Bayan-Obo is the largest deposit of rare earths in the world and is geographically located in the inner Mongolia of China. It has more than 40 million confirmed stocks of these rare earth metals (REE) and to date has extracted only 35% of these stocks.

The problem with rare earths is the processes of extraction, separation and processing that are of high cost. They are capital intensive procedures and in addition are destructive to the environment because these rare metals are mixed with the radioactive elements thorium (Th), uranium (U) and want special treatment because they create radioactive waste. From the family of the seventeen rare earths metals only the Promethium (Pm) is radioactive.

The rational process of extraction, separation and treatment of these rare earths is costly if the environment is to be protected. Only Canadian and American companies in this industry follow high standards for the protection of the environment during these processes.

To increase the profitability of this industry, China does not apply these stringent standards, which should be applied throughout the process of acquiring rare earths. The company Baotou Steel throws the waste of this process into the Yellow River, sacrificing both the health of the workers and the natural environment itself.

The rare earths are used in products of a total commercial value that range around $6-$7trillion.

China, by controlling the entire value chain of rare earths has the potential to determine price fixing and supply of finished processed products (rare earth oxides, permanent magnets etc.).

This single element-advantage gives it the ability to determine the price level through the spin-at-the-test offer of these final products. In a drastic restriction of the global supply of these rare metals, due to the imposition of an embargo on these exports, prices will increase dramatically making difficult high-tech mass application in all areas of modern civilization, leading the world economy very quickly in a strong recession. 

The great danger of the global recession

As US President Donald Trump has previously expressed his desire the FED to reduce its dollar borrowing rates-in contrast to existing macroeconomic data-to further strengthen the US economy by bringing as example the economic policy implemented by China to strengthen the Chinese economy, it is very likely that US President Donald Trump to bring the FED to a fait accompli and enforce its requested policy, to proceed with the implementation of tariffs of 25% and on other Chinese imports worth $300 billion.

If these tariffs are imposed, then the FED will be forced to further reduce its borrowing rates to boost the US economy.

The investors generally tend to underestimate the dangers inherent in trade wars and the unpleasant effects they have on the global economy and growth in general.

Since the trade war intensified between the US and China, making use of both sides of their above described threats, the recession at global level will appear in less than a year (once the measures are fully enforced-threats so far on both sides) due to a drastic increase in product prices and a more than corresponding reduction in consumer demand.

Thanos S. Chonthrogiannis

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